Inside Employee Motivation: Does Money Really Make a Difference?

Nadia Goodman, Entrepreneur

Monday, 26 Nov 2012 | 3:22 PM ETEntrepreneur

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This meeting? Total failure. My nap? Total success!

How do you keep your employees motivated? How do you show them that their work is valued? Many small business owners use bonuses or raises, and while everyone loves a little extra cash, motivating your team with money may not be as effective as you think. When used poorly, monetary rewards can feel like coercion, an effect you see in the classic carrot-and-stick approach to motivation.

"Unless you're extremely careful with how you use rewards, you get people who are just working for the money," said Edward Deci, a human motivation psychologist at University of Rochester.

Some experts, like Deci, discourage using money to motivate employees at all, especially when employees anticipate that reward before they finish the task. "We need to compensate people fairly, but when we try to use money to motivate them to do tasks, it can very likely backfire on us," he said.

Others believe that money can be used to motivate employees without compromising self-motivation.

"Money is highly motivational for people," said Ian Larkin, a professor of business administration at Harvard Business School. "But saying money is the only thing we should use is also silly. Companies probably think too much about using money as a motivator and too little about other motivators."

Here are a few tips to help you put both holiday bonuses and compensation packages in perspective:

1. Facilitate a sense of autonomy. Employees need autonomy and respect in order to feel motivated. When money is used as bait, it can undermine empowerment. In those situations, Deci says that employees feel controlled and lose their self-motivation. An office that demands grueling hours in exchange for quarterly bonuses might convince employees to do the work, but it will likely be lower quality.

Instead, offer your employees reasonable freedoms, listen to them, and give them an opportunity to pursue and achieve their goals. Create a positive and pleasant work environment so you don't need bait just to keep them coming into the office.

2. Use a variety of individualized rewards. Just as you need to tailor your management style for each employee, your motivational style needs to be tailored as well. Consider your employees' values, tasks, and goals. "The devil is in the details when it comes to incentives and motivation," Larkin said. "Monetary rewards are not a one size fits all kind of thing."

Remember, rewards are add-ons, not the whole package. "You don't want to fall into the trap of thinking that rewards can do everything for you," Larkin said. "Management is much more important than the design of an incentive program." Talk to people, understand their needs, and give them opportunities to grow and take ownership. Ultimately, those efforts will be much more motivating.

3. Focus on the means as well as the end. If getting a bonus is the primary goal, employees will start taking short-cuts. "If the activity is an instrument to the reward, then they'll try to do it as easily as they can," Deci said. At the extreme, think of Enron employees inflating stock prices or Wall Street brokers selling bad mortgages.

As a leader, emphasize the broader goals, such as the company's mission, and pay attention to how your employees reach their goals. Reward the people who embody your values most fully, and be clear that those are the behaviors you want to reinforce.